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Blockchain for Dummies! Part 3: Blockchain Technology in the Market 2017

Welcome back to Let’s Hash It Out! This is part 3 of the “Blockchain for Dummies” trilogy of posts that are intended to be a starting point for anyone wanting to learn about blockchain! You can find a video version of this post on my YouTube Channel if that’s more your jam.

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If you haven’t read part 1 and 2 of this “Blockchain for Dummies” you can find those posts here and here. If you have read part 1 and 2 or you already understand what blockchain is and how it works, read onward! (Do whatever you want, I’m not the boss of you) Per the definition outlined in part 1, Blockchain is defined as a peer-to-peer digital ledger of immutable transactions organized into timestamped blocks that can only be confirmed by network consensus. Each block that is created contains a reference to the previous block, forming a chain of blocks called the blockchain. On this blockchain, these transactions represent the transfer of value, either tangible (a product) or intangible (currency). However, besides the obvious places that blockchain can be a good fit like banking, what else can it do? That’s what this post is all about!

Blockchain is a technology that has deep roots in economics, game theory, and even management paradigms common in business. Often, the hype surrounding blockchain as it relates to cryptocurrency and other financial applications drowns out every other idea that uses the technology, however, some of the most impactful ways to implement blockchain are outside financial services! There are a few crucial aspects of blockchain that help determine its fit to a use case:

Trust – You will hear the word trust used constantly as it relates to blockchain, as the consensus process and the whole structure of the network is designed to allow parties who do not trust one another to transact without fear of being cheated. As a rule of thumb, the complexity, resource intensiveness, and tightness of the rules for consensus decreases as the level of trust between parties increases. For example, if I am on a private blockchain network with a few of my closest friends, we may not need consensus at all! We know eachother well and can easily work out any disagreements ourselves – especially because we have an immutable digital ledger of all transactions ever made, there is nowhere to hide the truth! You may be thinking, “what did he just say? a private blockchain?”. Yes, a private blockchain can be created amongst a group of people or even for a single person with custom rules. For those whose needs are not fulfilled by public blockchains like the mainstream Bitcoin and Ethereum, the code that runs these public networks is available open-source so that individuals or groups can create their own private version! Think of this like internet vs. intranet; many corporations have a private version of the internet called private intranet on which only their employees can interact with one another and it’s closed off to the public. Public vs. private blockchains operate the same way, and rely on different forms of trust when transacting with one another on the blockchain.

Trust can manifest in many ways, and in the business world it is less-so a matter trust as it is competing business need. Businnesses that are transacting with one another on a blockchain don’t necessarily distrust one another, they simply are all operating on the blockchain for a different business purpose. For example, consider a supply chain for diamonds. There are different players in that supply chain such as the diamond suppliers, the shippers, the retailers and the end consumer. In this environment, each player in the supply chain has different business needs, not necessarily distrusting the others but still operating with competing interests. The retailer for example wants to ensure they are receiving genuine diamonds to sell to their customers, while the diamond supplier simply wishes to get paid on time and in full for their product. On the blockchain, the payment can be facilitated instantly upon delivery of the products, and the diamond retailers can keep track of who they are buying from and keep suppliers accountable because they have a ledger of every diamond they have ever purchased and from whom. Trust comes in many forms, and in business it usually comes with competing business interests! The most important thing to note here is that a blockchain delivers the most value when all of the players in a business process or industry agree to participate in the network together with a set of mutually agreed operating rules; this structure is called a consortia. This theme of a consortia will pop up repeatedly in my posts and videos so keep that in mind. A transaction can represent the transfer of value, transfer of asset ownership, or even a business event. Blockchain is just as much about the organization around it as it is the technology!

Need for Audit-ability – blockchain provides an immutable list of every transaction ever made on the network, giving parties on the network the ability to hold one another accountable and easily audit the network. Ease of audit-ability is one of the most common reasons why business entities seek to implement blockchain – it makes compliance with audit requirements much simpler. For example, an insurance company may wish to implement a blockchain to track claims made on their customers’ policies. Throughout the fiscal year, each claim made is tracked on the blockchain and payment is facilitated therein – at the end of the fiscal year, all the insurance company has to do is query the blockchain for the transactions made to get the total claim value paid out against the total premium amount they have collected. They can even query the blockchain to view claims paid to specific people or groups. Because the blockchain is immutable, it becomes the central source of truth for claims data and the insurance company does not have to worry that it has been tampered with.

Exchange of Value – blockchain transactions are a clean slate, they can represent the exchange of value in the form of currency, a physical asset, a title of ownership for land, etc., and the consortia that runs the blockchain can decide what the transactions represent. Blockchain provides a medium on which companies, individuals, and organizations can exchange value with one another on a mutually accountable basis. Note that the exchange of value can be encapsulated into a business event.

Multiple Collaborative Writers – In the modern business world, most databases, IT systems, and applications are owned by one organization and not shared with anyone else, but as technologies like blockchain permeate industries, the shift to a new paradigm continues: the sharing economy. I will be posting an entire article about the sharing economy soon, so stay tuned on that! Businesses nowadays are realizing that they must work together with the other companies or organizations in their value chain to really reap the rewards of success, and blockchain is a great way to facilitate that collaboration. Blockchain is often used when multiple organizations with competing business interests wish to transact with one another or share information, but with limitations. In this use case, there have to be multiple writers on one network, which is where the blockchain thrives. Many different users can transact, share information and view information on the blockchain instantaneously with tightly controlled rules, high accountability. When multiple organizations wish to write to the same network, but have competing business interests, blockchain is a natural fit.

Decentralization – Similar to the way multiple businesses can generate value by sharing a transaction network and information within their value chain, the important thing to note is that there is no one owner of the blockchain. It is decentralized and shared amongst the participants. Remember the consortia topic? The consortia of businesses, organizations, etc. that share the blockchain determine the rules of engagement with eachother and hold one another accountable according to those rules. This also means that if one organization has a catastrophic IT incident and their node(s) goes down, when they reconnect to the blockchain, one of the other nodes on the network can feed them the information that they lost. In a traditional system, a catastrophic IT incident could mean all data is lost if the company did not have a backup. Decentralized computing systems like blockchain provides fault tolerance unique from centralized systems that are used traditionally.

Disintermediation – One of the most important benefits of blockchain is that it facilitates disintermediation, or the removal of 3rd parties (intermediaries) in a process. Disintermediation often comes hand and hand with cost savings, increased efficiency, and/or process refinement, thus businesses are seeking to take advantage of blockchain to disintermediate their own business processes. For example, let’s take a payments example again; if a business in North America wishes to send money to another business in Asia for a shipment of goods or the completion of a service, they must pay an exorbitant fee to make that transfer and wait up to one full business week for it to clear! This is because the process of cross-border payments involves manual paperwork and detailed checks before clearance of the payment. If the businesses were to transact on the blockchain, however, this takes the bank out of the equation and allows them to transact peer-to-peer directly with one another. This is disintermediation; without the bank as a 3rd party to validate the transaction and facilitate, the process can be completed much faster and for a menial fee. This is just one example of the power of the blockchain to disintermediate a process. When looking at a use case for blockchain, consider where a blockchain could help disintermediate a process or set of processes, because that is where a large proportion of the value lies!

I took this framework and applied it to an example use case outside of financial services, so if you would like to dive deeper into this topic please continue on below! My next post will be the first of many applying my evaluation criteria to startups with tokens for sale on open exchanges.

WIth all of this in mind, let’s talk about one use case that has gained quite a bit of traction in the market: supply chain traceability and provenance. Consider a supply chain for diamonds for example. There are several businesses and organizations that all interact with on another in the process of mining diamonds all through to final sale to the end consumer. Let’s take our framework above and analyze this use case.

Trust – As we discussed before, trust is tricky when it comes to businesses, it becomes more a question of competing business interest. In a simplified version of the supply chain for diamonds, for example, there are diamond miners/suppliers, shippers, retailers, and end consumers. Amongst all of these parties, the business process and business interest is different for each. For example, the supplier seeks to get paid for their goods and doesn’t care who the end consumer is – they sell to the retailers, whereas the retailer has to win over the end consumer and thus needs to ensure the diamonds they buy from the supplier are top quality. Can you see where some semblance of trust comes in? The retailer has to trust that the diamonds they buy from suppliers are legitimate and of good quality, and the supplier has to trust they will be paid in full and on-time.

Need for Audit-ability – In many business processes, compliance with audit processes are fulfilled at a bare minimum. However, in my humble opinion, the tighter control a business has over their data, the more control they have over their eventual success. Due to its immutable nature, blockchain becomes the universal source of truth for participants transacting on it – regardless of whether transactions represent the transfer of value or a business event. In the diamond supply chain example, every transaction of diamonds and payments for those diamonds is recorded immutably on the blockchain, creating an easily auditable and traceable history of the movement of diamonds from suppliers to retailers and eventually to the end consumer. This level of auditability into business events and transactions is unprecedented for both the businesses themselves and regulatory bodies.

Exchange of Value – In this case, the exchange of value occurs with a business event between two or more parties. For example, when a batch of diamonds changes hands from the supplier to the shipper, a transaction is created to record the payment from the supplier to the shipper for their service, as well as to note the changing of hands of the batch of diamonds.

Multiple Collaborative Writers – All of the entities in the diamond supply chain use case have business interests that they represent, and thus, they all collaboratively write transactions to the blockchain as business events occur. The business world is full of segregated, siloed systems both within and outside their organization – in this diamond supply chain use case, the blockchain forms a universal system on which all of the business entities can transact with one another and share data.

Decentralization – Each of the entities in the diamond supply chain are represented by nodes on the network, and no one entity “owns” the network. The rules of engagement are determined by the entire group such that everyone’s business interests are met and there are guidelines for consequence in the event of malpractice or failure to abide by the rules. Remember, this construct of collaboration between business entities guided by a set of rules and regulations is called a consortia. Furthermore, this decentralization means that if one entity’s systems go down and their node disconnects from the network, their data is not lost. When they reconnect, their data will be restored by other nodes on the network.

Disintermediation – The golden ticket for blockchain use cases is disintermediation; where can the blockchain remove a costly or innefficient intermediary or 3rd party? In the diamond supply chain, there are two intermediaries that can be removed with the use of blockchain. The first is the obvious one, the banks. With the blockchain, payments for goods can be facilitated instantaneously and at low-cost, as opposed to using banks. In addition, there is no need for lawyers or accountants to facilitate the agreement of terms for each transaction – the blockchain serves as a trust network to facilitate the purchase and sale of diamonds across the supply chain.

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